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Permanently Retain Retirement Earnings

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U.S. stock investors have been enjoying an extended period of low volatility and steady gains, but with the Federal Reserve on track to raise interest rates this year and major indexes near records, the market could get a bit choppier in coming weeks.  When the Fed does raise rates, that will mark the first increase since 2006 and end a roughly six-year stretch of near-zero interest rates that has helped the stock market rally broadly to new records, however there could be some choppy seas ahead.

An uncertain future spells risk and there are no exceptions; thus, proceed only if you can shoulder the risk of loss without suffering a retirement breakdown if not all goes according to expectations.  Don’t bet the farm on the market. If the market has appeal to you, then limit your exposure to what you feel can be lost without destroying the retirement that you’ve planned. Second, lock up an income you cannot outlive and if you have any money left you can then speculate in the market.

Your financial life, like climbing a mountain, does not end when you reach the summit.  Getting down the mountain safely is just as challenging as going up the mountain. Getting down safely, or making your retirement income last, requires a set of different strategies.  You face new risks different from those on the way up.  Many retirees depend on fixed-rate investments for a good portion of their retirement income — so it’s a real challenge when interest rates are low, as they have been for the past several years.

One of the biggest but least understood risks in retirement has to do with spending. Spending too much early in retirement could make it hard for you maintain your standard of living later, especially if you live past your life expectancy.  People are living longer than ever in history now, with a larger group of centenarians than we have ever seen.  People are outliving their money.  You may not live to be 100 — but it would be a good feeling to know that you could afford to do so.

In an ideal world — one that many investors think exists — you live off of dividends and returns without touching your principal.  To help prevent the possibility of outliving your financial resources — you will need to invest for income and growth throughout your retirement years.  There are more mutual funds than stocks.  According to the last count there are more than 10,000 mutual funds in North America, which ones do you choose?

However, each and every year, a huge number of mutual funds fail!  Notably, calculations of how well the fund industry is doing tend to focus on the group of funds that currently exist, ignoring those that have ceased to exist. The result is called “survivorship bias,” meaning people get false impressions about what types of returns an average mutual fund investor can expect. And it’s precisely those false impressions that contribute to a willingness on the part of investors to overlook the risk that a fund can fail.

In addition, given how many funds there are, not everyone can be above average.  Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else’s car.  Since most funds’ fees leave them underperforming the market indexes, the key is to find a fund that at least matches the market and has minimal fees.

Retirees need to be street wise geeks. We need to immediately recognize when someone has true expertise and when a person doesn’t have a clue what they are talking about.  The number of people who really understand financial planning gets smaller each year.  Put your money in the stock market. One day you make great gains but give them all back the next day. Adding to your woes is what will happen tomorrow or the day after.  Will you be blown off course and fail to reach your retirement destination?

Many brokers strongly favor actively managed funds over index funds.  Investing in index mutual funds gets a lot of positive press, and rightly so. Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. In many cases index funds outperform the majority of actively managed mutual funds. Just investing in an index fund or two doesn’t mean that you’re on your way towards achieving your investment or financial planning goals. Index funds are tools just like any other investment product.

Insights from finance research, suggests that the average investor should choose low-cost index funds over actively managed funds.  The more you pay, the less you have for yourself. Paying 0.5% or 1% of assets annually for active management seems like wasted money to many.  Investing in index mutual funds can be an excellent low cost strategy for part of your investment portfolio.  However, loading up on actively managed funds that a salesperson hopes will beat the market is a high-risk ticket to mediocrity.

History will tell but there is one certainty: money in the market is at risk.  If you cannot afford the risk of the market, there is never a good time to “get in” nor is there a good time to “get out”. If you’re at risk of losing what you’ve saved to support you and your loved ones in retirement, now is a good time to measure your market risk.

Retirement is the longest and most expensive journey you’ll ever take, you can’t borrow money to pay for it and you’ll have one chance to get it right.  If you’re interested in a guaranteed income for life that you cannot outlive regardless of what happens to the stock market, interest rates or real estate prices, the insurance industry has come to your rescue.

Annuities are contracts issued by an insurance company that are designed to efficiently turn a lump sum of cash into an income stream that cannot be outlived.  The key benefit to using an annuity for retirement income is that the income stream can be larger than that generated by other retirement income strategies.

The insurance industry, has developed policies that do guarantee you a lifetime of income – they’re called fixed annuities and they are backed by the full faith and credit of some of the world’s oldest, strongest and most trusted insurance companies. The same companies that insure your home, car, boat, health, life, business and virtually every other asset you have.

The “Retained Way”: lock in a lifetime income using an index-linked fixed annuity whose gains are permanently retained even if the market nosedives or interest rates go to zero. Once your guaranteed income is turned on, there are automatic lifetime income guarantees and peace of mind. You will not earn a bundle if the market soars but you won’t sing the blues if the market tail spins.

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Tuesday, May 26th, 2015 Wealth Management No Comments

Key Retirement Income Strategy

As one approaches retirement, you can’t afford to have your assets affected by a huge drop in the market right before you need to start using the money in your nest egg to live on.  Additionally. due to longer life expectancy, there is a good chance that you will end up living for 30 or 40 years in retirement. With increased improvements to medical technology, it is predicted that we will see significant additional growth in life expectancy and should expect it to rise even greater than the trends indicate. 

Stability is always an attractive quality when it comes to your personal finances – but even more so in retirement.  By giving up working, you will no longer receive a regular wage and be almost fully reliant upon your pensions, savings and investments to fund the rest of your life.  In such circumstances, the idea that you can exchange your pension pot for a regular income – guaranteed for as long as you live – has obvious appeal. 

A key strategy to fund a long life is to buy an annuity, which delivers a guaranteed payment until you die.  The key benefit to the annuity route is that your pension savings are used to provide you with a guaranteed income over the course of your retirement, however long it lasts.  Annuities can play a critical role in helping not only invest for retirement, but also insure for retirement by providing opportunities for growth and guaranteed lifetime income. 

These days, investors may be looking for a better balance between growth potential and market protection.  However, it is very difficult for financial markets to perform well enough for an investments-only retirement income plan to provide better outcomes than an integrated plan that includes risk pooling through income annuities.   

The right annuity product can protect a portion of your income while you grow the rest of your portfolio. You probably don’t want to convert your entire nest egg to an annuity, but using a portion of it to purchase an immediate annuity or a hybrid annuity can provide you with a degree of income security that won’t be affected by the market. You can then boost your overall portfolio yield by investing in dividend stocks or other assets that provide you with a better return.

When it comes to lifetime income annuities, most people don’t realize how these products are able to offer such high cash flows and payout rates. These humble annuities offers something that no other product can offer: longevity credits, otherwise known as mortality credits. This is what separates income annuities from other investment options.

Cash flow from an income annuity hails from three different sources: interest, a return of principal, and mortality credits. Traditional investments can typically manufacture two of these components — interest and return of principal. More importantly, only life insurance companies can manufacture mortality credits.

The updated mortality tables will require insurance companies to lower their payout rates in order to properly reflect longer life spans.  As more and more boomers approach retirement age and obtain annuities to cover their basic expenses, this demand, coupled with increasing life expectancies can have a dramatic effect on payout rates for future purchasers.

Combining the fear of outliving your money and the uncertainty of the market, you need to lock in these guaranteed rates now. These are likely the highest longevity credits you will see for the rest of your life.  I think most folks should stick to simple fixed annuities. Reason:  they remove much of the uncertainty about the future income stream you’ll be paid. In my opinion, this is precisely what most annuity buyers want in the first place!

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Thursday, May 14th, 2015 Wealth Management Comments Off

Challeging Retirement Solutions

Once a person has saved up a significant retirement nest egg, what’s next? Determining how to spend down retirement savings — without running out of money too early — is essential, but also challenging.

The U.S. economy is in much better shape than it was a few years ago. The bad news? Because we’re doing better, the Federal Reserve has signaled that it will hike interest rates soon, which could cause stocks to tank.  Investors also think that the raising of rates is coming. You’re seeing unwinds. The dollar’s down, and Treasury’s are down. You can’t blame weak economic data because if that’s why—then the dollar is down and Treasury yields are up. There’s a perception that the bull run is coming to a close.

Very few investors are able to beat the market consistently over time. In an effort to beat the market, investors often invest in stocks or market sectors that carry above average levels of risk. Everyone wants to buy into the stock market when it’s rising. The same psychology also applies when the market declines. Emotions take over, and you want to get out before you lose even more money.

But this is a strategy that’s guaranteed to lose money over time.  Meanwhile, comments from Federal Reserve chair Janet Yellen that the equities market is overvalued added to the market anxiety.  Many feel that they need to keep some money in safe investments such as short-term CDs as they can help you manage your fears about losing too much in bear markets.

By putting these assets into something where there is no risk at all can get you through the rough times.  If we’re indeed headed for a bear market, now might be a great time to look at indexed products, like indexed annuities and Indexed Universal Life (IUL), which can offer a certain amount of downside protection as well as potential for growth.

Funds paid into an indexed annuity are guaranteed against loss, even if the overall market drop causes an underlying index to decrease in value (credited with zero interest). However, the funds can be credited with interest based on the increased value of the underlying index.  For investors feeling jittery about upcoming market movements, then, indexed products might be the ideal solution.

In effect an annuity is longevity insurance. With traditional annuities the retiree takes the lump sum and hands it over to an insurance company, which guarantees a regular payment to the retiree until he or she dies.  An annuity, and the steady stream of income it can provide, might be able to help a retiree who is facing a shortfall. An indexed annuity, in particular, could provide that income as well as offer the potential for future gains, via interest crediting linked to the performance of an underlying index.

The single biggest advantage annuities have over other investments is that they can pay income that won’t run out no matter how long you live. They’re also able to generate a higher level of sustainable income than you could generate investing on your own taking comparable risk.

One reason would be to receive more guaranteed income than you’ll collect from Social Security and pensions alone. Many retirees enjoy the feeling of security that comes from covering all or most of their essential retirement living expenses with income they can count even if the market tanks.

If Social Security and pensions already cover your basic expenses — or if your nest egg is so large your chances of depleting it early are very small — then you may not need or want more assured income. But if that’s not the case, you might want to invest a portion of your savings in an income annuity.

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Saturday, May 9th, 2015 Wealth Management Comments Off

Retirement Risk to the Unknown

The scariest thing in the world is to run out of money. To enjoy your retirement years to the fullest — and to help prevent the possibility of outliving your financial resources — you will need to invest for income and growth throughout your retirement years. Social Security will probably make up a significant part of your retirement income.  However, many consumers don’t appreciate the risks they are facing in keeping other kinds of long-term retirement income.

The number of defined benefit plans has dramatically declined as 401(k) plans have taken the lead.  New mortality tables showing retirees are expected to live longer raised pension plans’ liabilities, forcing companies to set aside more money to meet them.  In a defined benefit plan, the employer has only an idea of what may be provided upon an employee’s retirement, based on years of service, age and income.

Low interest rates hurt pension funds two ways. First, they lower the returns on safe, fixed income investments like Treasury bonds. But they also drive up the current cost of providing a fixed monthly payment to retirees well into the future. That means companies have to set aside more money in their pension plans to cover the increased liability created by lower rates.

Defined contribution plans move more of the “risk of the unknown” to the employees’ plate. Mutual funds remain the investment of choice for many investors.  There is a greater recognition of the notion that stock investments are still risky even after long holding periods, and so efforts to ‘amortize the upside’ through higher spending may backfire on the retiree.

Workers with access to employer 401(k) plans must pick their own mutual funds or other investments, but typically it’s from a fairly narrow menu of perhaps a dozen pre-selected choices. Mutual funds come with significant risk as you will be subject to swings in the stock market.  Leaving money in a bank has (almost) zero risk but gives you a return of just 1%-2% at the moment.

Mutual funds are by their nature a collection of various individual stocks or bonds and other underlying investments. Essentially many mutual funds are invested in similar stocks and have the same investment objective. While you may have a number of different mutual funds however you certainly may not be diversified.

You should always understand all ways in which your financial advisor is compensated including compensation directly from mutual funds he or she might suggest.  Does the advisor receive an up-front load or sales charge or perhaps trailing compensation from the mutual funds in terms of 12b-1 fees?

Generally the funds are not the cheapest in terms of expenses and often include revenue sharing arrangements featuring the 12b-1 fees from the underlying mutual funds in addition to the wrap fee being charged by the brokerage firm.

Is it time for small investors to rediscover certificates of deposit? The idea is not as preposterously old fashioned as it seems.  Good financial advisers generally recommend keeping part of a portfolio in low-risk investments, and increasing that fraction as retirement age approaches. The idea is to cushion against crashing stock markets and keep cash handy, hopefully while still earning some income.

Stop worrying about the dreaded “running out of money”  This is the best time to buy income annuities, due to their combination of bond and mortality credits. For the retiree, those products are proportionately a much better deal than many other products.  This is likely a better strategy than going fully into drawdown and hoping to find a fund to replicate what an annuity will provide – you won’t.

There is nothing else that is going to provide you with the certainty and security of an annuity, so retirees should stick with annuities or, depending on the size of their pension pots, consider a combination of an annuity purchase to secure a basic guaranteed income for life and a portfolio of funds where they are prepared to take a greater level of risk.

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Monday, April 20th, 2015 Wealth Management Comments Off

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